Obesity remains a serious health problem and it is no secret that many people want to lose weight. Behavioral economists typically argue that “nudges” help individuals with various decisionmaking flaws to live longer, healthier, and better lives. In an article in the new issue of Regulation, Michael L. Marlow discusses how nudging by government differs from nudging by markets, and explains why market nudging is the more promising avenue for helping citizens to lose weight.

Two long wars, chronic deficits, the financial crisis, the costly drug war, the growth of executive power under Presidents Bush and Obama, and the revelations about NSA abuses, have given rise to a growing libertarian movement in our country – with a greater focus on individual liberty and less government power. David Boaz’s newly released The Libertarian Mind is a comprehensive guide to the history, philosophy, and growth of the libertarian movement, with incisive analyses of today’s most pressing issues and policies.

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Tag: economics

The latest Nobel Prize in economics has been awarded to Alvin Roth and Lloyd Shapley. They’ve done brilliant work on algorithms for optimally matching pairs of things (such as job vacancies and job seekers), but at least one prominent application of their work should produce a deafening roar of foreheads hitting desktops: public school choice.

As the Nobel organization’s website explains, the original algorithm was developed by Shapley and David Gale to optimally match pairs of individuals who could only each be matched with one other person. For instance, optimally marrying-off 10 men and 10 women based on their relative levels of interest in one another. Over the past decade, it has come to be used to match students to places in local public schools (by Roth).

The problem is that this approach to “school choice” correctly assumes that the better public schools have a fixed number of places and cannot expand to meet increased demand. So it’s about finding the least-awful allocation of students to a static set of schools—a process that does nothing to improve school quality.

Meanwhile, there is something called a “market” which not only allows consumers and producers to connect, it creates the freedoms and incentives necessary for the best providers to grow in response to rising demand and crowd-out the inferior ones. It also provides incentives for innovation and efficiency. But instead of advocating the use of market freedoms and incentives to improve education, some of our top economists are spending their skill and energy tinkering with the increasingly inefficient, pedagogically stagnant status quo.

Sometimes it’s no fun to be an economist. Or, to be more specific, it’s rather frustrating to understand Bastiat’s insight about the “seen” and the “unseen” and to always be asking “at what cost?” and “to what effect?” when politicians make inane statements.

But if you’re the type of person who recognizes the importance of tradeoffs and incentives, then it’s easy to see how a political success can be an economic failure. Which is the message of this new video from the Center for Freedom and Prosperity Foundation.

This is music to my ears. I’ve been saying for years that any company can be kept afloat indefinitely with taxpayers subsidies. So if that’s the definition of success, we can party until we hit the fiscal brick wall. But that wall won’t feel good, as we can see from the fiscal chaos in Greece and other European welfare states.

But this issue involves more than just inefficient subsidies. I’m also concerned about the corruption that inevitably exists when cronyism replaces capitalism.

My concern is long-term trends. Politicians should be complying with Mitchell’s Golden Rule, which means reducing government spending as a share of GDP (to put it in terms that make economists feel warm and fuzzy, gov’t exp/GDP should be decreasing).

In a violation of the 8th Amendment’s prohibition against cruel and unusual punishment, my brutal overseers at the Cato Institute required me to watch last night’s debate (you can see what Cato scholars said by clicking here).

But I will admit that it was good to see Obama finally put on the defensive, something that almost never happens since the press protects him (with one key exception, as shown in this cartoon).

On the specifics, I obviously didn’t like Obama’s predictable push for class warfare tax policy, but I’ve addressed that issue often enough that I don’t have anything new to add.

I was irked, though, by Obama’s illiteracy on the matter of business deductions for corporate jets, oil companies, and firms that “ship jobs overseas.”

Let’s start by reiterating what I wrote last year about how to define corporate income: At the risk of stating the obvious, profit is total revenues minus total costs. Unfortunately, that’s not how the corporate tax system works.

Sometimes the government allows a company to have special tax breaks that reduce tax liabilities (such as the ethanol credit) and sometimes the government makes a company overstate its profits by not allowing it to fully deduct costs.

During the debate, Obama was endorsing policies that would prevent companies from doing the latter.

…the “oil subsidies” Obama points to are broad-based tax deductions that oil companies also happen to get. I wrote last year about Democratic rhetoric on this issue: “tax provisions that treat oil companies like other companies become a ‘giveaway,’…”

…there’s no big giveaway to corporate jets. Instead, some jets are depreciated over five years and others are depreciated over seven years. I explained it last year. When it comes to actual corporate welfare for corporate jets, the Obama administration wants to ramp it up — his Export-Import Bank chief has explicitly stated he wants to subsidize more corporate-jet sales.

By the way, depreciation is a penalty against companies, not a preference, since it means they can’t fully deduct costs in the year they are incurred.

Obama rolled out the canard about tax breaks for “companies that ship jobs overseas.” Romney was right to fire back that this tax break doesn’t exist. Instead, all ordinary business expenses are deductible — that is, you are only taxed on profits, which are revenues minus expenses.

Tim’s actually too generous in his analysis of this issue, which deals with Obama’s proposal to end “deferral.” I explain in this post how the President’s policy would undermine the ability of American companies to earn market share when competing abroad - and how this would harm American exports and reduce American jobs.

To close on a broader point, I’ve written before about the principles of tax reform and explained that it’s important to have a low tax rate.

But I’ve also noted that it’s equally important to have a non-distortionary tax code so that taxpayers aren’t lured into making economically inefficient choices solely for tax reasons.

I try to be self aware, so I realize that I have the fiscal version of Tourette’s. Regardless of the question that is asked, I’m tempted to blurt out that the answer is to reduce the burden of government spending.

But sometimes that’s exactly the right prescription, particularly for an economy weighed down by a bloated public sector. And, as you can see from this chart, the French welfare state is enormous.

So is France also trying to offset the damage of excessive spending with good policy in other areas? Au contraire, President Hollande is compounding the damage with huge class-warfare tax hikes.

Here’s what the Wall Street Journal says about Hollande’s fiscal proposal—including the key revelation that spending will go up rather than down.

Remember all that euro-babble before the French election about fiscal “austerity” harming growth? Well, meet the new austerity, same as the old austerity, which means higher taxes on the private economy and token discipline for the state. Growth is an afterthought. That’s the lesson of French President François Hollande’s new “fighting” budget, which is supposed to reduce the deficit to 3% of GDP from 4.5% and represent the country’s toughest belt-tightening in three decades. …More telling is that two-thirds of the €30 billion in so-called savings is new tax revenue, and one-third comes from slowing spending growth. Total public expenditure—already the second most lavish in Europe—will increase by €6 billion to 56.3% of GDP.

The spending cuts are fictional, but the tax increases are very, very real.

The real austerity will be imposed on taxpayers, and not only on the rich. Income above €150,000 will now be taxed at 45%, up from the current 41%. Mr. Hollande’s 75% tax rate on income over €1 million comes into effect for two years, reaping expected (and predictably paltry) revenue of €200 million. That’s dwarfed by the €1 billion from reducing the threshold for the “solidarity” tax on wealth to €800,000 from €1.3 million. The French Socialists will also now tax investment income at the same high rates as regular income. The rates have been 19% for capital gains, 21% for dividends and 24% for interest income. If Mr. Hollande’s goal is to send capital out of France, that should help.

Anybody want to take bets, by the way, on whether the “temporary” two-year 75 percent tax rate still exists three years from now?

I say yes, in large part because the tax almost surely will lose revenue because of Laffer Curve effects. But rather than learn the right lesson and repeal the tax, Hollande will argue it needs to be maintained because revenues are “unexpectedly” sluggish.

It’s also remarkable that Hollande wants to dramatically increase tax rates on capital gains, dividends, and interest. These are all examples of double taxation.

And when you factor in the taxes at both the personal and business level, these charts show that France already has the highest tax on dividends in the developed world and the third-highest tax on capital. And Hollande wants to make a terrible system even worse. Amazing.

I’ve already predicted that France will be the next major economy to suffer a fiscal crisis. I was too clever to give a date, but Hollande’s policies are accelerating the day of reckoning.

…a tax of $25 per ton of CO2 emitted by developed countries is expected to raise $250 billion per year in global tax revenues. Such a tax would be in addition to taxes already imposed at the national level, as many Governments (of developing as well as developed countries) already tax carbon emissions, in some cases explicitly, and in other cases, indirectly through taxes on specific fuels.

Notice that the tax would apply only to “developed countries,” so this scheme is best characterized as discriminatory taxation. If Obama is genuinely worried about jobs being “outsourced” to developing nations like China (as he implies in his recent attack on Romney), then he should announce his strong opposition to this potential tax.

But don’t hold your breath waiting for that to happen.

Next, here’s what the UN says about a financial transactions tax:

A small tax of half a “basis point” (0.005 per cent) on all trading in the four major currencies (the dollar, euro, yen and pound sterling) might yield an estimated $40 billion per year. …even a low tax rate would limit high-frequency trading to some extent. It would thus result in the earning of a “double dividend” by helping reduce currency volatility and raising revenue for development. While a higher rate would limit trading to a greater extent, this might be at the expense of revenue.

But rather than reiterate some of my concerns about taxing financial consumers, I want to give a bit of a compliment to the UN: the bureaucrats, by writing that “a higher rate … might be at the expense of revenue,” deserve credit for openly acknowledging the Laffer Curve.

By the way, this is an issue where both the United States and Canada have basically been on the right side, though the Obama administration blows hot and cold on the topic.

Now let’s turn to the worst idea in the UN report. Its authors want to steal wealth from rich people. But even more remarkable, they want us to think this won’t have any negative economic impact.

…the least distorting, most fair and most efficient tax is a “lump sum” payment, such as a levy on the accumulated wealth of the world’s richest individuals (assuming the wealthy could not evade the tax). In particular, it is estimated that in early 2012, there were 1,226 individuals in the world worth $1 billion or more, 425 of whom lived in the United States, 90 in other countries of the Americas, 315 in the Asia-Pacific region, 310 in Europe and 86 in Africa and the Middle East. Together, they owned $4.6 trillion in assets, for an average of $3.75 billion in wealth per person. A 1 percent tax on the wealth of these individuals would raise $46 billion in 2012.

I’ll be the first to admit that you can’t change people’s incentives to produce in the past. So if you steal wealth accumulated as the result of a lifetime of work, that kind of “lump sum” tax isn’t very “distorting.”

But here’s some news for the UN: rich people aren’t stupid (or at least their financial advisers aren’t stupid). So you might be able to engage in a one-time act of plunder, but it is naiveté to think that this would be a successful long-term source of revenue.

Now let’s conclude with a very important warning. Some people doubtlessly will dismiss the UN report as a preposterous wish list. In part, they’re right. There is virtually no likelihood of these bad policies getting implemented any time in the near future.

But UN bureaucrats have been relentless in their push for global taxation, and I’m worried they eventually will find a way to impose the first global tax. And if you’ll forgive me for mixing metaphors, once the camel’s nose is under the tent, it’s just a matter of time before the floodgates open.

The greatest threat is the World Health Organization’s scheme for a global tobacco tax. I wrote about this issue back in May, and it seems my concerns were very warranted. Those global bureaucrats recently unveiled a proposal—to be discussed at a conference in South Korea in November—that would look at schemes to harmonize tobacco taxes and/or impose global taxes.

The World Health Organization (WHO) is considering a global excise tax of up to 70 percent on cigarettes at an upcoming November conference, raising concerns among free market tax policy analysts about fiscal sovereignty and bureaucratic mission creep. In draft guidelines published this September, the WHO Framework Convention on Tobacco Control indicated it may put a cigarette tax on the table at its November conference in Seoul, Korea. …it is considering two proposals on cigarette taxes to present to member countries. The first would be an excise tax of up to 70 percent. …The second proposal is a tiered earmark on packs of cigarettes: 5 cents for high-income countries, 3 cents for middle-income countries, and 1 cent for low-income countries. WHO has estimated that such a tax in 43 selected high-/middle-/low-income countries would generate $5.46 billion in tax revenue. …Whichever option the WHO ends up backing, “they’re both two big, bad ideas,” said Daniel Mitchell, a senior tax policy fellow at the Cato Institute. …Critics also argue such a tax increase will not generate more revenue, but push more sales to the black market and counterfeit cigarette producers. “It’s already a huge problem,” Mitchell said. “In many countries, a substantial share of cigarettes are black market or counterfeit. They put it in a Marlboro packet, but it’s not a Marlboro cigarette. Obviously it’s a big thing for organized crime.” …The other concern is mission creep. Tobacco, Mitchell says, is easy to vilify, making it an attractive beachhead from which to launch future vice tax initiatives.

It’s my final comment that has me most worried. The politicians and bureaucrats are going after tobacco because it’s low-hanging fruit. They may not even care that their schemes will boost organized crime and may not raise much revenue.

They’re more concerned about establishing a precedent that international bureaucracies can impose global taxes.

But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.

In the Belly of the Beast at the European Commission

There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.

While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.

Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”

But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.

Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.

In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.

But if the French government wants to track - and tax - that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.

Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.

Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right - at the very least - to charge you the difference between its price and the price at your new station.

Simply stated, you would not be allowed to benefit from lower prices at other gas stations.

So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.

Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.

P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.